In a sole proprietorship, the business is not a separate legal entity from the individual owner. In personal bankruptcy, the law treats the business and owner as the same legal entity. This puts the business assets at risk. However, as a tool of liquidating debt, including potential business debt, bankruptcy may be a step in the right direction for the business as well as the owner.

Debt Liabilities

Since a sole proprietorship is an unincorporated business, the owner is responsible for the debt of the business. The owner is also responsible for personal debt obligations. If an individual fails to make payment on a debt for the business, the creditor can go after the owner's personal assets. If the individual fails to make his personal debt obligations, business assets may also be at risk. Owners with too much debt may benefit from filing Chapter 7 bankruptcy.

Benefits of Personal Bankruptcy to Owners

Because there is no division of ownership of assets between a sole proprietorship and personal debt, the bankruptcy court treats all debts equally. The court may discharge all business and personal debts as one. Creditors may not come after any debts discharged in the bankruptcy, even business debt. This debt relief may enable a business owner to begin being profitable again. However, working with creditors with discharged debts may no longer be possible.

Assets and Income

As a sole proprietorship, all business and personal assets are treated equally in bankruptcy. The filer must disclose all income and assets, personal and business-related. This includes real estate, equipment, working capital, vehicles and any accounts receivable. In most situations, full disclosure of debt requires proof of income and assets, such as through the use of a balance sheet and a list of assets.

Exemptions

When filing personal bankruptcy with a sole proprietorship, the filer must ensure enough exemptions are available to avoid loss of assets. The bankruptcy trustee may seize nonexempt assets to sell to repay creditors. Aside from personal exemptions, most states provide for some exemptions for tools of trade. This may include business equipment. Reaffirming business loans may be an option for those business owners who still wish to maintain the assets under a low-equity loan. For example, maintaining a mortgage on a commercial building is possible if the equity is minimal.

Means Testing and Qualifying to File

To file personal bankruptcy, individuals must pass a means test, which, in part, considers how much income the filer earns annually. To file, individuals must be at or under the state median income. The filer must include business income in a sole proprietorship as personal income. Additionally, an expense sheet outlining how much income the individual needs will need to include business expenses. Profit and loss statements as well as other documentation can help to show these expenses thoroughly.